No Prepayment Penalty Loan: The 3 Best Options
Flexibility in your finances can be hugely important in providing some breathing room in times of financial difficulty, and this is especially true of personal loans. The more inflexible the terms, the more likely you will run into trouble repaying your loans.
A prepayment penalty is the exact kind of inflexible loan term that can cause you difficulty and penalizes you for getting out of debt quickly. This article discusses prepayment penalties and explores lenders that offer loans without these penalties.
What are Prepayment Penalties?
Prepayment penalties are a fee that lenders levy against borrowers when the borrower repays their loan before the scheduled loan term.
Personal Loan Prepayment Penalties
For a personal loan, you will agree to a certain set loan term, over which you will repay the principal amount, plus interest.
So, let’s say you take out a $5,000 loan at 10% interest, and have a loan term of 2 years. You agree to 24 monthly payments of $230. Then, let’s say you have a cash windfall, or earn a bonus at work after one year, and decide to pay down the full amount at that point. This would save you hundreds of dollars in interest. However, if the lender charges prepayment penalties, these penalties could cut into this savings, or swallow it entirely.
Why Do Lenders Charge Prepayment Fees?
Lenders earn money by charging interest, and the longer the loan term, the more interest will accumulate. If you pay off your loans early, the lender is losing out on the interest payments for the remainder of the loan. Since the earnings from this interest are factored into the terms and interest rate that the lender initially offers, some lenders reserve the right to charge a fee if you pay off your loans early.
How Much Are Prepayment Penalties?
The cost of prepayment penalties varies greatly, depending on how the lender chooses to calculate the penalty, as well as the type of loan and the length of time left on the loan term. The three main ways that prepayment penalties are calculated are:
- Percentage of balance: Let’s say you try to pay off the full remaining balance on a 5-year loan term after 4 years. The lender may charge a certain percentage of the remaining balance that you pay off at that point as a prepayment penalty.
- Interest: Taking the same example of paying off a 5-year loan after 4 years, a lender may, instead, charge you 1 year worth of interest payments
- Flat fee: Other lenders, rather than tying the penalty to the amount of interest or balance left over, simply charge a flat fee for any borrower that pays off a loan early.
Do All Loans Come with Prepayment Penalties?
No, some lenders charge prepayment penalties and others do not.
3 Best Lenders for a No Prepayment Penalty Loan
If you want to maximize your financial flexibility and give yourself the option of paying off your loans early, you should seek out a lender that does not charge prepayment penalties. There are a number of prominent lenders who do not charge prepayment penalties, and we have listed some of the most well-regarded in the following section.
Stilt is an online lender, headquartered in San Francisco, California, that services the immigrant and noncitizen community in America. Immigrants often have difficulty obtaining loans because of the temporary nature of visa status and their lack of credit history. Stilt seeks to remedy this by establishing eligibility criteria that consider other factors besides credit.
Stilt’s loan services cater to immigrants and noncitizens in other ways as well. Immigrants can use as much financial flexibility as possible, so Stilt does not charge prepayment penalties. This can be especially valuable for immigrants whose visa status changes or who need to leave the country and pay off loans quickly.
At a glance:
- Interest rate: 7.99%-15.99%
- Max. Loan Term: 2 years
- Max. Loan Amount: $25,000
LendingClub offers personal loans with no prepayment penalties as well. Rather than functioning as a traditional lender, LendingClub is a peer-to-peer lender, which involves pairing borrowers with individual lenders who provide the funds for loans. LendingClub is the largest online lender for personal loans in the U.S. However, LendingClub also has fairly high standards, and loans primarily to borrowers with high income or a good credit score.
At a glance:
- Interest rates: 6.95% to 35.89%
- Max. loan amount: $40,000
- Max. term length: 5 years
SoFi is another of the most prominent online lenders that offer no prepayment penalty loans. SoFi offers larger amounts than Stilt and LendingClub, topping out at $100,000. However, their eligibility criteria are steep, with the average borrower with Sofi earning more than $100,000 per year. SoFi offers flexibility with their terms, however, including no late fees and hardship protections.
Interest rates: 6.99% to 15.49%
Max. loan amount: $100,000
Max. loan term: 7 years
The quicker you get out of debt, the better, and yet prepayment penalties disincentivize doing exactly that. One of the cardinal rules of debt management is using unexpected cash windfalls to pay off debts. If you are stuck in a loan with prepayment penalties you lose the ability to do this, and any financial flexibility that would come with it.
Any debts which accumulate interest should be paid off as quickly as possible, so finding a lender that does not have prepayment penalties is extremely valuable. Make sure you read the fine print and investigate whether any lender that you consider charges prepayment penalties.